'Objective' Bayesian Unit Root Tests

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Due to weaknesses in traditional tests a Bayesian approach is developed to investigate whether unit roots exist in macroeconomic time-series. Bayesian posterior odds comparing unit root models to stationary and trend-stationary alternatives are calculated using informative priors. Two classes of reference priors which are informative but require minimal subjective prior input are used. In this sense the Bayesian unit root tests developed here are objective. Bayesian procedures are carried out on the C. Nelson-C. Plosser (1982) and R. Shiller (1981) data sets as well as on generated data. The conclusion is that the failure of classical procedures to reject the unit root hypothesis is not necessarily proof that a unit root is present with high probability. Copyright 1992 by John Wiley & Sons, Ltd.

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